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6-07.VYLENE [impl. covenant to negotiate franchise renewal].doc

was a core proceeding within the literal language of 28 U.S.C. §  157(b)(2)(M).   In ruling on the merits of Naugles' motion for preliminary injunction, the bankruptcy judge found that the failure of the parties to negotiate in good faith for a renewal of the franchise agreement resulted in the failure of a condition precedent to the expiration of the agreement.   Thus, the bankruptcy judge held that the franchise agreement was still in effect and Vylene's continued use of the trademark was proper.

Naugles appealed the bankruptcy court's denial of its motions for preliminary injunction and for relief from the stay.   The district court reversed, holding that the bankruptcy judge had misinterpreted the right of first refusal clause in the franchise agreement and that Vylene had no right to renew under the agreement.  In re Vylene Enterprises, Inc., CV 86-72881 JSL, Order Reversing and Remanding to Bankruptcy Court (C.D. Cal. June 25, 1987), appeal dismissed sub nom., Naugles Inc. v. Vylene Enterprises, Inc., 891 F.2d 295 (9th Cir.1989).   Vylene appealed the district court's order to this court.   The appeal, however, was dismissed as moot, and the bankruptcy court order denying a preliminary injunction and the district court order reversing and remanding were vacated.   The appeal became moot because the bankruptcy court had granted Naugles' renewed motion for relief from the automatic stay and allowed Naugles to take possession of the franchise premises due to Vylene's failure to pay franchise fees and rent pursuant to the court's provisional order.   Further, Vylene's Chapter 11 proceeding had been converted into a Chapter 7 case based on Vylene's failure to comply with the financial reporting requirements imposed upon a debtor in possession.

However, because neither appellate decision addressed the bankruptcy court's finding that the adversary proceeding was a core proceeding, the bankruptcy court held a trial in three phases over a period of nearly three years concerning Vylene's claims for breach of the franchise agreement and for breach of the implied covenant of good faith and fair dealing.   The bankruptcy court found that Naugles breached the franchise agreement and the covenant of good faith and fair dealing by opening a competing franchise within the immediate vicinity of the Vylene franchise and by refusing to negotiate in good faith for a renewal.   The bankruptcy judge held that Vylene had suffered damages in the amount of $2,219,468 and awarded attorneys' fees and costs of $550,000 to Vylene.

On appeal, the district court held that the bankruptcy court erred in determining that *1475 the action was a core proceeding and vacated and remanded to the bankruptcy court for the preparation of proposed findings of fact and conclusions of law.   On

Seg. 6, item 7 (2007)

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